Twenty years ago millions watched Band Aid, went on strike, celebrated Torvill and Dean winning an Olympic gold and bought shares in British Telecom.

Tuesday marks the 20th anniversary of the first government privatisations, and the first tranche of BT shares to be sold into private ownership on the stock market. More than 2 million private investors bought shares on 30 November, 1984, and those still holding on to their shares have done rather nicely, thank you.

BT shares worth £1,000 at issue would today have a face value of about £2,175 - an increase of 117.5 per cent. But analysis by Fidelity Investments shows that the real winners are those who reinvested the dividends in more BT shares. They would be sitting on shares worth £5,710, including their original £1,000 stake.

John Stavis, manager of Fidelity's Income Plus Fund, says the findings show the importance of dividends when investing in shares. 'Going forward, investing in large companies that hand back regular cash to investors can be an extremely effective investment strategy.'

Although BT shareholders have made a tidy profit, people who bought shares in British Gas just over two years later have fared the best. The face value of BG shares bought on 5 December, 1986, has increased by 477 per cent, but if the dividends were reinvested, shareholders would be sitting on an increase of 1,253 per cent.

Water has also provided a good return, with Severn Trent shares increasing by 263.5 per cent since listing, or 842 per cent if dividends were reinvested.

Reinvestment has not always worked. The original investors in Corus, formerly British Steel, have seen their shares slump by 42 per cent since the company's stockmarket listing in December 1988, thanks to the cyclical nature of steel prices, fierce competition from overseas manufacturers, appalling industrial relations and the inflexible and impractical locations of British steel plants. Even if their dividends had been reinvested, shareholders would only have a 21.5 per cent increase to show for 16 years' investment.

Investing in individual companies is neither practical nor suitable for people with small amounts or with a low tolerance to risk, but it's still possible to invest in high yielding companies and reinvest the dividends through an equity income fund and using the income generated to buy more units or shares in the fund.

Justin Modray, of independent financial adviser BestInvest, says: 'Even if there's no growth in share prices, this type of fund will still yield 3-4 per cent. And because they tend to invest in companies that are part of old-fashioned industries, they tend to be less susceptible to market fluctuations. So they balance out growth funds in a portfolio.'

The most economic way of doing this is to choose an income fund that offers 'accumulation' shares or units. Income generated by this type of share is automatically reinvested, usually without having to pay an initial fee.

Modray says his firm is reluctant to recommend Jupiter Income for this purpose because it only offers income shares that charge 5.25 per cent for reinvestment. Instead Modray recommends the following, which all offer accumulation units: Framlington Monthly Income, which yields 4 per cent net; Invesco Perpetual High Income, which yields 4.1 per cent, and Artemis Income, which yields 3.4 per cent.